THE CURRENT ACCOUNT BALANCE S to be an absise financial systems cannot allocate foreign capital cicletly) nomic concept. But in countries that are spending a lot more Mareer in practice, private capital often flows from develop abroad ran they are taking in the current account is the pointing to advanced economics, Advanced comis, vuch as the * which international Economics edides with political reality, United States les chart), run current accour deficit, whereas When countries to large deficits, businesses, trade anions and developing and energing market economies denrum surpluses parliamentariat are often quick to poltst accusing finger at or neatplus. Very poor countrie typically run large current trading partners and make chatges about that practces. But acccam deficits, in proportion to their GDP, that are hinanced do such charges have merit? And are current account deficits by afficial grants and horam necessarily had anyway Idare trying to answer such questions, Onc point that the savings-investment balance approach we first need to understand whar the current account is and underscores is thar protectionist policies are likely to be af wharopluxes and deficit imply much use in reproving the current account balance because there is no obvious connection between protectionist and Measuring the current account savings or investment The trade balance is the difference between the value of export Another way to look at the current account is interes of the of goods and services and the value of import of goods and timing of trade. We are used to intratemporal rade-exchanging servicet Awade dehol means that the country is inporting cloth for wine today. But we can also think of intentionparal more goods and services daan it is exportettet a trade surplus trade-importing goods today (ranning a current account mests the appetite. The current account balance be then the deficit and, in return, exporting goods in the future framning trade bolasice plus met factct income (such an interest and dir a carrent account surplus then). Jeit as a country mas import idends sem forage investments or workers' remitrance and one good and expor another under et atemporal trade there transfers from abroad rud a foreign aid, which are mully is not a country should not import goods of day and a small fraction of the total Since (for most countries, there export goods af arou in litle titferner In the traile halamayant the CUTRE Intertempural herrira of the current rental me the account a current account deficit often mies the hackkea of contempo- smoothing sole that current count deficits and protectionists, who-apparently forgetting that a main reason surpluses can play. For instance, if a candy struck by to expert is to be able to inport-chink that exports are good" hack perhaps natural disaster-char temporarily deprem and imports are "bad." its ability to acces productive capacity, ratherilan take the full The current account can also be expressed as the difference brunt of the shod immediately, the country can spread out the between national (both public and private savings and invest pain over time by running a cattute account deficit. Conversely, mentA current account deficit may therefore releer low research also suggests that countries that are subject to large levd of national avings relative to investment or a high rate of buckbould, on average runs current contest surpluse ata Investment of both. Fie capital per developing comes form of precautionary ving which bave marimestment opportunities then they can atford to make because of low domestic saviep, a current account deficit When persistent is too persistent may be natural. A detalt potentially pure fanera pegawth Docsit matter how long a country mana a current account and ecotomic developme-although recent research does not deficit? When a country is a current account deficit, it is indicate that developing cotiomics with an account det billing up liabilities to the rest of the world that are financed Ligaw laser plus les developed by wie se lancia. Eventually descu LE 46 FINANCE & DEVELOPMENT to II. HOW ECONOMIES FUNCTION 121 Net foreign borrower The United States uma persistenthilone al tate and cutest court deficit and uses foreign aptalte finance the difference between domestic investest and desting Bar toon fast domestic credit growth anfavor able terms of trade shocks, low growth 15+ in partner countries and higher interest rates in industrial countries influence the currencen el Marcent literature has also focused on the spor tance of balance sheet vulnerabilities in the run-apoches the rem to which companies have largeliabilities 1 in foreign currencies such as dollars or maturity mumaches hat occur when he companies have more short-term liabil -tartistpai ) ities than sutterm assets and more frer. www.A1% medium and long term wees vellesa Note Financial accountant com poplacent. mbeliabilities Recent search has also undercared the importance of the com- position of capital inflow for cumple paid back. Common sense suggess har if a country fritters the relative stability of foreiga direct lavestment compared with THE CURRENT ACCOUNT BALANCE S to be an absise financial systems cannot allocate foreign capital cicletly) nomic concept. But in countries that are spending a lot more Mareer in practice, private capital often flows from develop abroad ran they are taking in the current account is the pointing to advanced economics, Advanced comis, vuch as the * which international Economics edides with political reality, United States les chart), run current accour deficit, whereas When countries to large deficits, businesses, trade anions and developing and energing market economies denrum surpluses parliamentariat are often quick to poltst accusing finger at or neatplus. Very poor countrie typically run large current trading partners and make chatges about that practces. But acccam deficits, in proportion to their GDP, that are hinanced do such charges have merit? And are current account deficits by afficial grants and horam necessarily had anyway Idare trying to answer such questions, Onc point that the savings-investment balance approach we first need to understand whar the current account is and underscores is thar protectionist policies are likely to be af wharopluxes and deficit imply much use in reproving the current account balance because there is no obvious connection between protectionist and Measuring the current account savings or investment The trade balance is the difference between the value of export Another way to look at the current account is interes of the of goods and services and the value of import of goods and timing of trade. We are used to intratemporal rade-exchanging servicet Awade dehol means that the country is inporting cloth for wine today. But we can also think of intentionparal more goods and services daan it is exportettet a trade surplus trade-importing goods today (ranning a current account mests the appetite. The current account balance be then the deficit and, in return, exporting goods in the future framning trade bolasice plus met factct income (such an interest and dir a carrent account surplus then). Jeit as a country mas import idends sem forage investments or workers' remitrance and one good and expor another under et atemporal trade there transfers from abroad rud a foreign aid, which are mully is not a country should not import goods of day and a small fraction of the total Since (for most countries, there export goods af arou in litle titferner In the traile halamayant the CUTRE Intertempural herrira of the current rental me the account a current account deficit often mies the hackkea of contempo- smoothing sole that current count deficits and protectionists, who-apparently forgetting that a main reason surpluses can play. For instance, if a candy struck by to expert is to be able to inport-chink that exports are good" hack perhaps natural disaster-char temporarily deprem and imports are "bad." its ability to acces productive capacity, ratherilan take the full The current account can also be expressed as the difference brunt of the shod immediately, the country can spread out the between national (both public and private savings and invest pain over time by running a cattute account deficit. Conversely, mentA current account deficit may therefore releer low research also suggests that countries that are subject to large levd of national avings relative to investment or a high rate of buckbould, on average runs current contest surpluse ata Investment of both. Fie capital per developing comes form of precautionary ving which bave marimestment opportunities then they can atford to make because of low domestic saviep, a current account deficit When persistent is too persistent may be natural. A detalt potentially pure fanera pegawth Docsit matter how long a country mana a current account and ecotomic developme-although recent research does not deficit? When a country is a current account deficit, it is indicate that developing cotiomics with an account det billing up liabilities to the rest of the world that are financed Ligaw laser plus les developed by wie se lancia. Eventually descu LE 46 FINANCE & DEVELOPMENT to II. HOW ECONOMIES FUNCTION 121 Net foreign borrower The United States uma persistenthilone al tate and cutest court deficit and uses foreign aptalte finance the difference between domestic investest and desting Bar toon fast domestic credit growth anfavor able terms of trade shocks, low growth 15+ in partner countries and higher interest rates in industrial countries influence the currencen el Marcent literature has also focused on the spor tance of balance sheet vulnerabilities in the run-apoches the rem to which companies have largeliabilities 1 in foreign currencies such as dollars or maturity mumaches hat occur when he companies have more short-term liabil -tartistpai ) ities than sutterm assets and more frer. www.A1% medium and long term wees vellesa Note Financial accountant com poplacent. mbeliabilities Recent search has also undercared the importance of the com- position of capital inflow for cumple paid back. Common sense suggess har if a country fritters the relative stability of foreiga direct lavestment compared with